Quarterly Report (10-q)

Share Name	Share Symbol	Market	Type
Dean Foods Company New	NYSE:DF	NYSE	Common Stock

	Price Change	% Change	Share Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	0.80				0	00:00:00

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



(Mark One)
☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2019



☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from to

Commission File Number 001-12755

Dean Foods Co mpany

(Exact name of the registrant as specified in its charter)



Delaware		75-2559681
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

2711 North Haskell Avenue, Suite 3400

Dallas , Texas 75204

( 214 ) 303-3400

(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value	DF	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

As of August 5, 2019 , the number of shares of the registrant's common stock outstanding was: 91,893,614 .

Table of Contents



			Page
Part I — Financial Information

Item 1	—	Condensed Consolidated Financial Statements (Unaudited)	3
Item 2	—	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3	—	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4	—	Controls and Procedures	42

Part II — Other Information

Item 1	—	Legal Proceedings	43
Item 1A	—	Risk Factors	43
Item 6	—	Exhibits	43

Signatures			44

Table of Contents

Part I — Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)



	June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	20,947		$	24,176
Receivables, net of allowances of $5,402 and $5,994	509,811			589,263
Inventories	283,092			255,484
Other current assets	47,352			43,357
Total current assets	861,202			912,280
Property, plant and equipment, net	965,334			1,006,182
Operating lease right of use assets	303,928			—
Identifiable intangible and other assets, net	191,833			197,512
Deferred income taxes	—			2,518
Total	$	2,322,297		$	2,118,492

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	654,035		$	699,661
Current maturities of long term debt and finance leases	1,060			1,174
Operating lease liabilities	93,090			—
Total current liabilities	748,185			700,835
Long-term debt, net	983,875			905,170
Deferred income taxes	4,008			13,707
Long-term operating lease liabilities	225,607			—
Other long-term liabilities	164,863			184,048
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, none issued	—			—
Common stock, 91,884,320 and 91,438,768 shares issued and outstanding, with a par value of $0.01 per share	919			914
Additional paid-in capital	664,732			661,630
Accumulated deficit	(386,932		)	(260,977		)
Accumulated other comprehensive loss	(94,059		)	(98,607		)
Total Dean Foods Company stockholders’ equity	184,660			302,960
Non-controlling interest	11,099			11,772
Total stockholders’ equity	195,759			314,732
Total	$	2,322,297		$	2,118,492

See Notes to unaudited Condensed Consolidated Financial Statements.

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DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share data)



	Three Months Ended June 30						Six Months Ended June 30
	2019			2018			2019			2018
Net sales	$	1,843,498		$	1,951,230		$	3,638,932		$	3,931,737
Cost of sales	1,464,018			1,518,446			2,885,699			3,050,450
Gross profit	379,480			432,784			753,233			881,287
Operating costs and expenses:
Selling and distribution	335,852			336,721			673,564			682,717
General and administrative	71,546			65,972			144,631			141,494
Amortization of intangibles	5,150			5,078			10,300			10,156
Facility closing and reorganization costs, net	7,400			67,661			11,732			76,123
Impairment of long-lived assets	11,860			2,232			11,860			2,232
Other operating income	—			(2,289		)	—			(2,289		)
Equity in (earnings) loss of unconsolidated affiliate	(688		)	(1,699		)	(2,643		)	(3,599		)
Total operating costs and expenses	431,120			473,676			849,444			906,834
Operating loss	(51,640		)	(40,892		)	(96,211		)	(25,547		)
Other expense:
Interest expense	16,200			14,069			35,200			28,102
Other expense, net	1,500			782			1,712			1,252
Total other expense	17,700			14,851			36,912			29,354
Loss before income taxes	(69,340		)	(55,743		)	(133,123		)	(54,901		)
Income tax benefit	(4,477		)	(13,727		)	(6,433		)	(12,620		)
Loss from continuing operations	(64,863		)	(42,016		)	(126,690		)	(42,281		)
Gain on sale of discontinued operations, net of tax	—			1,922			—			1,922
Net loss	(64,863		)	(40,094		)	(126,690		)	(40,359		)
Net loss attributable to non-controlling interest	392			—			645			—
Net loss attributable to Dean Foods Company	$	(64,471	)	$	(40,094	)	$	(126,045	)	$	(40,359	)
Average common shares:
Basic	91,758,807			91,342,652			91,643,179			91,267,748
Diluted	91,758,807			91,342,652			91,643,179			91,267,748
Basic loss per common share:
Loss from continuing operations attributable to Dean Foods Company	$	(0.70	)	$	(0.46	)	$	(1.38	)	$	(0.46	)
Income from discontinued operations attributable to Dean Foods Company	—			0.02			—			0.02
Net loss attributable to Dean Foods Company	$	(0.70	)	$	(0.44	)	$	(1.38	)	$	(0.44	)
Diluted loss per common share:
Loss from continuing operations attributable to Dean Foods Company	$	(0.70	)	$	(0.46	)	$	(1.38	)	$	(0.46	)
Income from discontinued operations attributable to Dean Foods Company	—			0.02			—			0.02
Net loss attributable to Dean Foods Company	$	(0.70	)	$	(0.44	)	$	(1.38	)	$	(0.44	)

See Notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)



	Three Months Ended June 30						Six Months Ended June 30
	2019			2018			2019			2018
Net loss	$	(64,863	)	$	(40,094	)	$	(126,690	)	$	(40,359	)
Other comprehensive income (loss):
Pension and other postretirement liability adjustment, net of tax	2,420			1,602			4,548			3,226
Other comprehensive income	2,420			1,602			4,548			3,226
Reclassification of stranded tax effects related to the Tax Act	—			—			—			(16,847		)
Comprehensive loss	(62,443		)	(38,492		)	(122,142		)	(53,980		)
Comprehensive loss attributable to non-controlling interest	392			—			645			—
Comprehensive loss attributable to Dean Foods Company	$	(62,051	)	$	(38,492	)	$	(121,497	)	$	(53,980	)

See Notes to unaudited Condensed Consolidated Financial Statements.

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DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)



	Dean Foods Company Stockholders
	Common Stock							Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest		Total Stockholders’ Equity
	Shares		Amount		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest		Total Stockholders’ Equity
Balance, January 1, 2018	91,123,759		$	911	$	659,227		$	74,219		$	(78,410	)	$	—	$	655,947
Issuance of common stock	246,180		2		40			—			—			—		42
Repurchase of shares for withholding taxes	(37,612	)	—		(365		)	—			—			—		(365		)
Share-based compensation expense	—		—		1,742			—			—			—		1,742
Net loss	—		—		—			(265		)	—			—		(265		)
Dividends	—		—		—			(8,365		)	—			—		(8,365		)
Reclassification of stranded tax effects related to the Tax Act(1)	—		—		—			16,847			(16,847		)	—		—
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $521	—		—		—			—			1,624			—		1,624
Balance, March 31, 2018	91,332,327		913		660,644			82,436			(93,633		)	—		650,360
Issuance of common stock	41,628		1		337			—			—			—		338
Repurchase of shares for withholding taxes	(5,426	)	—		(48		)	—			—			—		(48		)
Share-based compensation expense	—		—		1,950			—			—			—		1,950
Net (loss) attributable to Dean Foods Company	—		—		—			(40,094		)	—			—		(40,094		)
Dividends	—		—		—			(8,399		)	—			—		(8,399		)
Fair value of non-controlling interest acquired	—		—		—			—			—			11,752		11,752
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $539	—		—		—			—			1,602					1,602
Balance, June 30, 2018	91,368,529		$	914	$	662,883		$	33,943		$	(92,031	)	$	11,752	$	617,461


(1)	Refer to Note 1 - Recently Adopted Accounting Pronouncements within our Notes to unaudited Condensed Consolidated Financial Statements for additional details on the adoption of ASU No. 2018-02 during the first quarter of 2018.

See Notes to unaudited Condensed Consolidated Financial Statements.

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DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)



	Dean Foods Company Stockholders
	Common Stock								Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total Stockholders’ Equity
Balance, January 1, 2019	91,438,768		$	914		$	661,630		$	(260,977	)	$	(98,607	)	$	11,772		$	314,732
Issuance of common stock	390,640		4			159			—			—			—			163
Repurchase of shares for withholding taxes	(90,937	)	(1		)	(375		)	—			—			—			(376		)
Share-based compensation expense	—		—			1,293			—			—			—			1,293
Net loss attributable to Dean Foods Company	—		—			—			(61,574		)	—			—			(61,574		)
Net loss attributable to non-controlling interest	—		—			—			—			—			(253		)	(253		)
Repurchase of subsidiary's common stock															(28		)	(28		)
Dividends(1)	—		—			—			61			—			—			61
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $291	—		—			—			—			2,128			—			2,128
Balance, March 31, 2019	91,738,471		917			662,707			(322,490		)	(96,479		)	11,491			256,146
Issuance of common stock	163,826		2			209			—			—			—			211
Repurchase of shares for withholding taxes	(17,977	)	—			(31		)	—			—			—			(31		)
Share-based compensation expense	—		—			1,847			—			—			—			1,847
Net loss attributable to Dean Foods Company	—		—			—			(64,471		)	—			—			(64,471		)
Net loss attributable to non-controlling interest	—		—			—			—			—			(392		)	(392		)
Dividends(1)	—		—			—			29			—			—			29
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $0	—		—			—			—			2,420			—			2,420
Balance, June 30, 2019	91,884,320		$	919		$	664,732		$	(386,932	)	$	(94,059	)	$	11,099		$	195,759

(1)

During the three months ended March 31, 2019 and the three months ended June 30, 2019 , participants forfeited accrued dividends related to previously-granted restricted share units ("RSUs") and performance share units ("PSUs"), causing a reduction to our accumulated deficit position. Under our long-term incentive compensation program, cash dividend equivalent units for RSUs and PSUs are accrued over time as our Board of Directors declares cash dividends and vest in cash at the same time as the underlying award. No dividends were declared or paid during the three months ended March 31, 2019 and three months ended June 30, 2019 .

See Notes to unaudited Condensed Consolidated Financial Statements.

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DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



	Six Months Ended June 30
	2019			2018
Operating activities:
Net loss	$	(126,690	)	$	(40,359	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization	76,048			80,102
Non-cash lease expense	63,028			—
Share-based compensation expense	3,731			6,625
Non-cash facility closing and reorganization costs, net	417			43,734
Impairment of long-lived assets	11,860			2,232
Write-off of financing costs	3,755			—
Other operating income	—			(2,289		)
Equity in earnings of unconsolidated affiliate	(2,643		)	(3,599		)
Deferred income taxes	(7,472		)	(16,472		)
Other, net	(5,377		)	(3,022		)
Changes in operating assets and liabilities:
Receivables, net	79,452			84,105
Inventories	(27,610		)	2,220
Prepaid expenses and other assets	(2,496		)	10,942
Accounts payable and accrued expenses	(32,987		)	(43,459		)
Operating lease liabilities	(62,222		)	—
Cash provided by (used in) operating activities	(29,206		)	120,760
Investing activities:
Capital spending	(44,983		)	(37,292		)
Payments for acquisitions, net of cash acquired	—			(13,324		)
Proceeds from sale of fixed assets	4,632			12,418
Cash used in investing activities	(40,351		)	(38,198		)
Financing activities:
Debt repayments	(773		)	(589		)
Payments of financing costs	(9,561		)	—
Proceeds from senior secured revolver	550,101			185,800
Payments for senior secured revolver	(563,001		)	(197,000		)
Proceeds from receivables securitization facility	615,000			1,240,000
Payments for receivables securitization facility	(525,000		)	(1,285,000		)
Repurchase of subsidiary's common stock	(28		)	—
Cash dividends paid	—			(16,438		)
Issuance of common stock, net of share repurchases for withholding taxes	(410		)	(413		)
Cash provided by (used in) financing activities	66,328			(73,640		)
Change in cash and cash equivalents	(3,229		)	8,922
Cash and cash equivalents, beginning of period	24,176			16,512
Cash and cash equivalents, end of period	$	20,947		$	25,434

See Notes to unaudited Condensed Consolidated Financial Statements.

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DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

1. Basis of Presentation and Recently Adopted Accounting Pronouncements

Nature of Our Business — We are a leading food and beverage company and the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products in the United States, with a vision to be the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion.

Basis of Presentation — The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information as well as instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have reflected all material adjustments of a normal and recurring nature necessary for the fair presentation of the results for the periods presented.

For further information, refer to the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the years ended December 31, 2019 and 2018 .

Unless otherwise indicated, references in this report to “we,” “us,” “our” or "the Company" refer to Dean Foods Company and its subsidiaries, taken as a whole.

Recently Adopted Accounting Pronouncements

ASU No. 2016-02 — We adopted ASU 2016-02, Leases (Topic 842) (the New Lease Standard) as of January 1, 2019. The New Lease Standard requires lessees to recognize a right-of-use (ROU) asset and a lease liability on the balance sheet for operating leases. Accounting for finance leases is substantially unchanged.

We adopted the New Lease Standard using the comparative reporting at adoption method. Under this method, financial results reported in periods prior to January 1, 2019 are unchanged. We also elected the package of practical expedients which among other things, does not require reassessment of lease classification. We have implemented processes and a lease accounting system to ensure adequate internal controls are in place to assess our contracts and enable proper accounting and reporting of financial information.

The adoption of this standard had a significant impact to our condensed consolidated balance sheet due to the recognition of approximately $358 million of operating lease liabilities with corresponding operating lease ROU assets as of January 1, 2019. See Note 6 for further discussion.

Recently Issued Accounting Pronouncements

Effective in 2020

ASU No. 2018-13 — In August 2018, the FASB issued ASU 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement , which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement . The amendments were issued as a part of the FASB's disclosure framework project, which seeks to improve the effectiveness of disclosures in the notes to the financial statements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of this guidance. We do not intend to early adopt this ASU. We do not expect the adoption of ASU 2018-13 to have a material impact on our financial statements.

ASU No. 2018-15 — In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact ASU 2018-15 will have on our financial statements. We do not intend to early adopt this ASU. We do not expect the adoption of ASU 2018-15 to have a material impact on our financial statements.

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Effective in 2021

ASU No. 2018-14 — In August 2018, the FASB issued ASU 2018-14, Compensation — Retirement Benefits —Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans , which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures, and adding disclosure requirements identified as relevant. The amendments were issued as a part of the FASB's disclosure framework project, which seeks to improve the effectiveness of disclosures in the notes to the financial statements. The new guidance is effective for public entities for fiscal years beginning after December 15, 2020. Early adoption is permitted. We do not intend to early adopt this ASU. The amendments should be applied retrospectively. We do not expect the adoption of ASU 2018-14 to have a material impact on our financial statements.

2 . Revenue Recognition

Disaggregation of Net Sales

The following table presents a disaggregation of our net sales by product type and revenue source. We believe these categories most appropriately depict the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with our customers.



	Three Months Ended				Six Months Ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
	(In thousands)
Fluid milk	$	1,092,856	$	1,157,288	$	2,227,752	$	2,417,222
Ice cream(1)	316,398		321,005		541,598		560,603
Fresh cream(2)	104,143		99,816		200,518		191,766
Extended shelf life and other dairy products(3)	44,571		46,183		88,156		91,425
Cultured	64,839		65,504		126,746		129,670
Other beverages(4)	65,580		66,700		133,990		137,044
Other(5)	27,756		30,794		46,651		63,098
Subtotal	1,716,143		1,787,290		3,365,411		3,590,828
Sales of excess raw materials	90,122		122,880		208,515		274,682
Sales of other bulk commodities	37,233		41,060		65,006		66,227
Total net sales	$	1,843,498	$	1,951,230	$	3,638,932	$	3,931,737


(1)	Includes ice cream, ice cream mix and ice cream novelties.


(2)	Includes half-and-half and whipping creams.


(3)	Includes creamers and other extended shelf life fluids.


(4)	Includes fruit juice, fruit flavored drinks, iced tea, water and flax-based milk.


(5)	Includes items for resale such as butter, cheese, eggs and milkshakes.

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The following table presents a disaggregation of our net product sales between sales of Company-branded products versus sales of private label products:



	Three Months Ended				Six Months Ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
	(In thousands)
Branded products	$	856,984	$	871,269	$	1,708,480	$	1,763,395
Private label products	859,159		916,021		1,656,931		1,827,433
Subtotal	1,716,143		1,787,290		3,365,411		3,590,828
Sales of excess raw materials	90,122		122,880		208,515		274,682
Sales of other bulk commodities	37,233		41,060		65,006		66,227
Total net sales	$	1,843,498	$	1,951,230	$	3,638,932	$	3,931,737

Revenue Recognition and Nature of Products and Services

We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Revenue is recognized upon transfer of control of promised goods or services to our customers’ facility in an amount that reflects the consideration we expect to ultimately receive in exchange for those promised goods or services. Revenue is recognized net of allowances for product returns, trade promotions and prompt pay and other discounts.

The substantial majority of our revenue is derived from the sale of fluid milk, ice cream and other dairy products, which includes sales of both Company-branded products as well as private label products. In addition, we derive revenue from the sale of excess raw materials and the sale of other bulk commodities.

Our portfolio of products includes fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy and dairy case products. We sell these products under national, regional and local proprietary or licensed brands, or under private labels. Our sales of excess raw materials consist primarily of bulk cream sales. As a result of the purchase of raw milk, we obtain more butterfat than is needed in our production process. Excess butterfat is sold, primarily in the form of bulk cream, to third parties. Additionally, in certain cases we may be required to externally purchase bulk cream in order to fulfill minimum supply requirements for our customers. In these cases, we purchase bulk cream from other processors or suppliers and resell it to our customers to fulfill our contractual requirements with them.

In all cases, we recognize revenue upon delivery to our customers as we have determined that this is the point at which control is transferred, our performance obligation is complete, and we are entitled to consideration.

Contractual Arrangements with Customers

The majority of our sales are to retailers, warehouse clubs, distributors, foodservice outlets, educational institutions and governmental entities with whom we have contractual agreements. Our sales of excess raw materials and other bulk commodities are primarily to dairy cooperatives, dairy processors or other manufacturers for use as a raw ingredient in their respective manufacturing processes. Our customer contracts typically contain standard terms and conditions and a term sheet. In some cases, upon expiration, these arrangements may continue with the same terms and may not be formally renewed. Additionally, we have a number of informal sales arrangements with certain local and regional customers, which we consider to be contracts based on the criteria outlined in ASC 606. Payment terms and conditions vary by customer, but we generally provide credit terms to customers ranging up to 30 days; therefore, we have determined that our contracts do not include a significant financing component. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses based on our historical experience.

We have determined that we satisfy our performance obligations related to our customer contracts at a point in time, as opposed to over time, and accordingly, revenue is recognized at a point in time across all of our revenue streams. Therefore, we do not have any contract balances with our customers recorded on our unaudited Condensed Consolidated Balance Sheets.

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Sales Incentives and Other Promotional Programs

We routinely offer sales incentives and discounts through various regional and national programs to our customers and consumers. These programs include scan backs, product rebates, product returns, trade promotions and co-op advertising, product discounts, product coupons and amounts paid to customers for shelf space in retail stores. The expenses associated with these programs are accounted for as reductions to the transaction price of our products and are therefore recorded as reductions to gross sales.

Some of our sales incentives are recorded by estimating incentive costs or redemption rates based on our historical experience and expected levels of performance of the trade promotion or other program. We maintain liabilities at the end of each period for the estimated incentive costs incurred but unpaid for these programs. Differences between estimated and actual incentive costs are normally not material and are recognized in earnings in the period such differences are determined.

3 . Investment in Affiliates and Discontinued Operations

Unconsolidated Affiliate and Related Party

Organic Valley Fresh Joint Venture — In the third quarter of 2017, we commenced the operations of our 50/50 strategic joint venture with Cooperative Regions of Organic Producer Pools (“CROPP”), an independent farmer cooperative that distributes organic milk and other organic dairy products under the Organic Valley ^® brand. The joint venture, called Organic Valley Fresh, combines our processing plants and refrigerated DSD system with CROPP's portfolio of recognized brands and products, marketing expertise, and access to an organic milk supply from America's largest cooperative of organic dairy farmers to bring the Organic Valley ^® brand to retailers. We and CROPP each made a capital contribution of $2.0 million to the joint venture during the third quarter of 2017.

We have concluded that Organic Valley Fresh is a variable interest entity, but we have determined that we are not the primary beneficiary of the Organic Valley Fresh joint venture because we do not have the power to direct the activities that most significantly affect the economic performance of the joint venture; therefore, the financial results of the joint venture have not been consolidated in our unaudited Condensed Consolidated Financial Statements. We are accounting for this investment under the equity method of accounting. Our equity in the earnings of the joint venture is included as a component of operating income as we have determined that the joint venture's operations are integral to, and an extension of, our business operations. Our equity in the earnings of the joint venture was $0.7 million and $1.7 million for the three months ended June 30, 2019 and 2018 , respectively, and $2.6 million and $3.6 million for the six months ended June 30, 2019 and 2018 , respectively.

Controlling Interest in Consolidated Affiliate

Good Karma — On May 4, 2017, we acquired a non-controlling interest in, and entered into a distribution agreement with, Good Karma Foods, Inc. (“Good Karma”), the leading producer of flax-based beverage and yogurt products. This investment allows us to diversify our portfolio to include plant-based dairy alternatives and provides Good Karma the ability to more rapidly expand distribution across the U.S., as well as increase investments in brand building and product innovation.

On June 29, 2018, we increased our ownership interest in Good Karma to 67% with an additional investment of $15.0 million , resulting in control under acquisition method accounting. Good Karma’s results of operations have been consolidated in our unaudited Condensed Consolidated Statements of Operations from the date of acquisition.

Prior to the June 29, 2018 step-acquisition, we accounted for our investment in Good Karma under the equity method of accounting based upon our ability to exercise significant influence over the investee through our ownership interest and representation on Good Karma's board of directors. Our equity in the earnings of this investment was not material to our unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2018 .

On October 12, 2018, we made a capital contribution to Good Karma of $3 million . Our current ownership interest in Good Karma is 69% .

Discontinued Operations

During the second quarter of 2018 , we recognized a net gain from discontinued operations of $1.9 million , net of tax, resulting from a tax refund received from the settlement of a state tax refund claim related to our 2013 sale of Morningstar Foods, LLC.

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4 . Inventories

Inventories at June 30, 2019 and December 31, 2018 consisted of the following:



	June 30, 2019		December 31, 2018
	(In thousands)
Raw materials and supplies	$	112,285	$	101,620
Finished goods	170,807		153,864
Total	$	283,092	$	255,484

5 . Goodwill and Intangible Assets

As of June 30, 2019 and December 31, 2018, the net carrying value of goodwill was zero . We recorded a total goodwill impairment charge of $190.7 million in December 2018 in connection with our quantitative impairment analysis. We have not acquired additional goodwill during the six months ended June 30, 2019 .

The net carrying amounts of our intangible assets other than goodwill as of June 30, 2019 and December 31, 2018 were as follows:



	June 30, 2019										December 31, 2018
	Acquisition Costs		Impairment			Accumulated Amortization			Net Carrying Amount		Acquisition Costs		Impairment			Accumulated Amortization			Net Carrying Amount
	(In thousands)
Intangible assets with indefinite lives:
Trademarks	$	69,315	$	—		$	—		$	69,315	$	69,315	$	—		$	—		$	69,315
Intangible assets with finite lives:
Customer-related and other	83,545		—			(47,507		)	36,038		83,545		—			(45,423		)	38,122
Trademarks	230,709		(109,910		)	(82,837		)	37,962		230,709		(109,910		)	(74,621		)	46,178
Total	$	383,569	$	(109,910	)	$	(130,344	)	$	143,315	$	383,569	$	(109,910	)	$	(120,044	)	$	153,615

Our finite-lived trademarks will be amortized on a straight-line basis over their remaining useful lives, which range from approximately 1 to 7 years , with a weighted-average remaining useful life of approximately 5 years . Amortization expense on intangible assets for the three months ended June 30, 2019 and 2018 was $5.2 million and $5.1 million , respectively. The amortization of intangible assets is reported on a separate line item in our unaudited Condensed Consolidated Statements of Operations.

Estimated aggregate intangible asset amortization expense for the next five years is as follows (in millions):



2019	$	20.6
2020	12.5
2021	10.8
2022	8.1
2023	7.3

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6 . Leases

We determine if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities and long-term operating lease liabilities in our unaudited Condensed Consolidated Balance Sheet. Finance leases are included in property, plant, and equipment, the current maturities of long-term debt and finance leases, as well as long-term debt, net in our unaudited Condensed Consolidated Balance Sheet. Our finance leases are not material.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate derived from information available at the lease commencement date to determine the present value of our lease payments if a discount rate is not stated within the lease agreement. To estimate the incremental borrowing rate, we utilize a risk-free rate plus our incremental interest rate spread for collateralized debt, which is updated on a quarterly basis. We use multiple incremental borrowing rates that correspond to the term of the lease.

We lease certain property, vehicles used in the distribution of our product, and equipment. As of June 30, 2019 , we had approximately 1,600 leases with remaining terms ranging from less than one year to 20 years . Our leases primarily consist of:

• Land and buildings of our manufacturing facilities and corporate office

• Leased vehicles within our direct-to-store delivery (“DSD”) system

• Leased equipment primarily related to equipment used in the production of our products.

We also have certain storage service agreements that may be treated as real estate leases. Storage agreements providing us with both fully dedicated square footage and the right to designate how the space is utilized are classified as a lease and included in the ROU asset and corresponding lease liability. To determine if a storage agreement has an embedded real estate lease we analyze the agreement to determine if the facility has space that is fully dedicated to storing and managing our products. If the space is fully dedicated to our products, we analyze whether or not we have the right and ability to dictate how the designated space will be utilized to manage our refrigerated and frozen products. Fixed payment amounts related to those agreements are included in the determination of the ROU asset and lease liability.

Our senior secured revolving credit facility and our receivables backed securitization facility contain certain restrictions on finance lease activities as these are treated as indebtedness and subject to the indebtedness covenants pursuant to these credit agreements. See further discussion of debt facilities and covenant restrictions in Note 7 .

Our lease terms may include options to extend or terminate the lease. We include options to extend the lease when it is reasonably certain that we will exercise that option based on the individual lease and our business objectives at lease inception. We have elected to not record leases with a term of 12 months or less on the balance sheet. Certain vehicle leases contain residual value guarantees (“RVG”). We continue to monitor whether amounts related to RVGs are probable of being owed. As of June 30, 2019 and December 31, 2018, we do not expect to make any payments related to RVGs, and our maximum exposure under those guarantees is not a material amount; therefore, we have excluded from the determination of lease payments.

We have elected the practical expedient to combine the lease and non-lease components for all asset classes, except vehicles. For vehicles, we have three separate full service agreements, wherein the agreements provide for certain maintenance services to be included in the overall cost to lease the asset. We determined the stand-alone prices for each of the lease and non-lease components based on comparisons to similar supplier arrangements (such as the cost to lease a vehicle without maintenance services and the cost to obtain maintenance services for a non-leased vehicle). The total transaction price is allocated to the lease and non-lease components on a relative stand-alone price basis.

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The components of lease expenses were as follows (in thousands):



	Quarter ended			Six months ended
	June 30, 2019			June 30, 2019
Operating lease cost	$	31,633		$	63,028
Finance lease cost	367			673
Amortization of ROU assets	324			609
Interest on lease liability	43			64
Short term lease cost (1)	$	3,895		$	8,741
Variable lease cost (2)	2,964			5,794
Sublease income	(1,744		)	(3,324		)
Total net lease cost	$	37,115		$	74,912

(1) Related to leases with a term of 12 months or less that are not recorded on the balance sheet.


(2)	Certain operating lease agreements require the payment of additional payments for maintenance, along with additional rentals based on miles driven or units produced.

Supplemental balance sheet information related to leases was as follows (in thousands):



	As of
	June 30, 2019
Operating leases:
Operating lease ROU asset	$	303,928

Current operating lease liabilities	93,090
Long-term operating lease liabilities	225,607
Total operating lease liabilities	$	318,697

The weighted-average remaining lease term of our operating leases as of June 30, 2019 was 4.8 years , and our weighted-average discount rate was 6.4% .

Supplemental cash flow and other information related to leases was as follows (in thousands):



	Quarter ended		Six months ended
	June 30, 2019		June 30, 2019
Operating cash flows information:
Cash paid for amounts included in the measurement of lease liabilities	$	31,208	$	62,222

Non-cash activity:
Right of use assets obtained in exchange for operating lease obligations	$	9,823	$	25,083

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Maturities of operating lease liabilities were as follows (in thousands):



	As of June 30, 2019
2019 (excluding the six months ended June 30, 2019)	$	58,667
2020	94,448
2021	69,190
2022	49,428
2023	37,071
2024	25,098
Thereafter	32,933
Total lease payments	$	366,835
Less: imputed interest	(48,138		)
Total lease obligations	$	318,697
Less: current obligations	93,090
Long-term lease obligations	$	225,607

Disclosures related to periods prior to adoption of the New Lease Standard

Prior to the adoption of this standard, our future minimum payments under non-cancelable operating leases with terms in excess of one year were as follows (in thousands):



	As of December 31, 2018
2019	$	118,827
2020	90,615
2021	64,501
2022	45,049
2023	32,771
Thereafter	50,998
Total minimum lease payments	$	402,761

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7 . Debt

Our long-term debt as of June 30, 2019 and December 31, 2018 consisted of the following:



	June 30, 2019					December 31, 2018
	Amount			Interest Rate		Amount			Interest Rate
	(In thousands, except percentages)
Dean Foods Company debt obligations:
Senior secured revolving credit facility	$	6,400		7.25	% *	$	19,300		4.65	% *
Senior notes due 2023	700,000			6.50		700,000			6.50
	706,400					719,300
Subsidiary debt obligations:
Receivables securitization facility	280,000			3.89	*	190,000			3.54	*
Finance lease and other	2,560			—		1,618			—
	282,560					191,618
Subtotal	988,960					910,918
Unamortized debt issuance costs	(4,025		)			(4,574		)
Total debt	984,935					906,344
Less current portion	(1,060		)			(1,174		)
Total long-term portion	$	983,875				$	905,170

* Represents a weighted average rate, including applicable interest rate margins.

The scheduled debt maturities were as follows (in thousands):



	As of June 30, 2019
2019	$	557
2020	541
2021	159
2022	280,170
2023	700,182
Thereafter(1)	7,351
Subtotal	988,960
Less unamortized debt issuance costs	(4,025		)
Total debt	$	984,935

(1) Our senior secured revolving credit facility was extended on February 22, 2019 to a maturity date of February 22, 2024 that springs to September 15, 2022 in the event we don’t repay or refinance $700 million in aggregate principal amount of 6.50% senior notes due 2023 (the “2023 Notes”) on or prior to July 15, 2022.

Senior Secured Revolving Credit Facility — On February 22, 2019, we entered into that certain Credit Agreement, by and among the Company, Coöperatieve Rabobank U.A., New York Branch, as administrative agent, and the lenders party thereto (the “Credit Agreement”), pursuant to which the lenders party thereto have provided us with a senior secured revolving borrowing base credit facility with a maximum facility amount of up to $265 million (the “Credit Facility”). Borrowings under the Credit Facility are limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount is equal to 65% of the appraised value of certain of our real property and equipment. We have currently elected to include real estate and equipment with appraised values sufficient to support a borrowing base of $265 million . Our ability to access the full borrowing base is limited by the requirement under the Credit Agreement to maintain liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) in an amount equal to 50% of the borrowing base under the Credit Facility at any time when the Company's fixed charge coverage ratio is less than 1.05 to 1.00. The Credit Facility matures on February 22, 2024, with a September 15, 2022 springing maturity date in the event the 2023 Notes are not refinanced or repaid on or prior to July 15,

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2022. A portion of the Credit Facility is available for the issuance of up to $25 million of standby letters of credit and up to $10 million of swing line loans.

Loans outstanding under the Credit Facility bear interest, at our option, at either: (i) the Base Rate (as defined in the Credit Agreement) or (ii) the Adjusted Eurodollar Rate (as defined in the Credit Agreement), plus a margin of between 1.25% and 1.75% (in the case of Base Rate loans) or 2.25% and 2.75% (in the case of Eurodollar Rate loans), in each case based on our total net leverage ratio.

We may make optional prepayments of the loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, and with a 50% commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds relating to the assets not included in the borrowing base. The Credit Facility is guaranteed by our existing and future wholly owned material domestic subsidiaries, which are substantially all of our existing domestic subsidiaries other than the subsidiaries that are sellers under the Receivables Securitization Facility.

The Credit Agreement contains customary representations, warranties and covenants, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of the 2023 Notes, investments, loans and advances, transactions with affiliates and sale and leaseback transactions. The Credit Agreement also contains customary events of default and related cure provisions. The Credit Agreement includes a fixed charge covenant that requires us to maintain a fixed charge coverage ratio of at least 1.05 to 1.00 at any time that our liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) at such time is less than 50% of the borrowing base under the Credit Facility.

On June 28, 2019, we amended the Credit Agreement to, among other things, permit our borrowing base to equal 65% of the appraised value of the real property and equipment included in the appraisal report delivered to the administrative agent (up to maximum facility amount).

In connection with the execution of the Credit Agreement, including the amendment thereof and post-closing appraisal work, we paid certain arrangement fees of approximately $4.9 million to lenders and other fees of approximately $1.9 million , which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $3.3 million of unamortized deferred financing costs in connection with the termination of that certain Credit Agreement, originally dated as of March 26, 2015, among the Company, Bank of America, N.A., as Administrative Agent and the lenders party thereto (as amended, the “prior credit agreement”).

At June 30, 2019 , we had $6.4 million outstanding borrowings under the Credit Facility. Our average daily balance under the Credit Facility during the six months ended June 30, 2019 was $16.1 million . There were no letters of credit issued under the Credit Facility as of June 30, 2019 .

Dean Foods Receivables Securitization Facility — We have a $450 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to two wholly-owned entities intended to be bankruptcy-remote, as is customary for receivables securitization facilities. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our unaudited Condensed Consolidated Balance Sheets, and the Receivables Securitization Facility is treated as a borrowing for accounting purposes.

On January 17, 2019, we amended and restated the existing receivables purchase agreement ("Receivables Purchase Agreement") governing our Receivables Securitization Facility to, among other things, (i) waive compliance with the financial covenant in the Receivables Purchase Agreement requiring the Company to maintain a total net leverage ratio (as defined in the Receivables Purchase Agreement) of less than or equal to 4.25 to 1.00 for the test period ended December 31, 2018 (the “Financial Covenant”) and (ii) any cross default under the Receivables Purchase Agreement arising from non-compliance with the Financial Covenant under the prior Credit Facility.

On February 22, 2019, we amended and restated the Receivables Purchase Agreement to, among other things, extend the liquidity termination date. The Receivables Purchase Agreement contains covenants consistent with those contained in the Credit Agreement.

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In connection with the execution of this amendment and restatement of the Receivables Purchase Agreement, we paid certain arrangement fees of approximately $2.2 million to lenders and other fees of approximately $0.5 million , which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $0.4 million of unamortized deferred financing costs in connection with prior amendments to the Receivables Purchase Agreement.

Based on the monthly borrowing base formula, we had the ability to borrow up to $428.8 million of the total commitment amount under the Receivables Securitization Facility as of June 30, 2019 . The total amount of receivables sold to these entities as of June 30, 2019 was $496.5 million . During the first six months of 2019 , we borrowed $0.6 billion and repaid $0.5 billion under the facility with a remaining balance of $280.0 million as of June 30, 2019 . In addition to letters of credit in the aggregate amount of $147.9 million that were issued but undrawn, the remaining available borrowing capacity was $0.9 million at June 30, 2019 . Our average daily balance under this facility during the six months ended June 30, 2019 was $265.1 million . The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.

Dean Foods Company Senior Notes due 2023 — On February 25, 2015, we issued $700 million in aggregate principal amount of 6.50% senior notes due 2023 at an issue price of 100% of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act.

In connection with the issuance of the 2023 Notes, we paid certain arrangement fees of approximately $7.0 million to initial purchasers and other fees of approximately $1.8 million , which were deferred and netted against the outstanding debt balance, and will be amortized to interest expense over the remaining term of the 2023 Notes.

The 2023 Notes are our senior unsecured obligations. Accordingly, the 2023 Notes rank equally in right of payment with all of our existing and future senior obligations and are effectively subordinated in right of payment to all of our existing and future secured obligations, including obligations under our Credit Facility and receivables securitization facility, to the extent of the value of the collateral securing such obligations. The 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by our subsidiaries that guarantee obligations under the Credit Facility.

The 2023 Notes will mature on March 15, 2023, and bear interest at an annual rate of 6.50% . Interest on the 2023 Notes is payable semi-annually in arrears in March and September of each year.

We may, at our option, redeem all or a portion of the 2023 Notes at the applicable redemption prices specified in the indenture governing the 2023 Notes (the "Indenture"), plus any accrued and unpaid interest to, but excluding, the applicable redemption date. If we undergo certain kinds of changes of control, holders of the 2023 Notes have the right to require us to repurchase all or any portion of such holder’s 2023 Notes at 101% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.

The Indenture contains covenants that, among other things, limit our ability to: (i) create certain liens; (ii) enter into sale and lease-back transactions; (iii) assume, incur or guarantee indebtedness for borrowed money that is secured by a lien on certain principal properties (or on any shares of capital stock of our subsidiaries that own such principal properties) without securing the 2023 Notes on a pari passu basis; and (iv) consolidate with or merge with or into, or sell, transfer, convey or lease all or substantially all of our properties and assets, taken as a whole, to another person unless certain customary conditions are met.

The carrying value under the 2023 Notes at June 30, 2019 was $696.0 million , net of unamortized debt issuance costs of $4.0 million .

See Note 8 for information regarding the fair value of the 2023 Notes as of June 30, 2019 .

Finance Lease Obligations and Other — Finance lease obligations of $2.6 million and $1.6 million as of June 30, 2019 and December 31, 2018 , respectively, were primarily comprised of our leases for information technology equipment. See further discussion of our lease obligations in Note 6 .

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8 . Derivative Financial Instruments and Fair Value Measurements

Derivative Financial Instruments

Commodities — We are exposed to commodity price fluctuations, including in the prices of milk, butterfat, sweeteners and other commodities used in the manufacturing, packaging and distribution of our products, such as natural gas, resin and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month ’s to one year ’s anticipated requirements, depending on the ingredient or commodity. These contracts are considered normal purchases.

In addition to entering into forward purchase contracts, from time to time we may purchase over-the-counter contracts from qualified financial institutions or enter into exchange-traded commodity futures contracts for raw materials that are ingredients of our products or components of such ingredients. All commodities contracts are marked to market in our income statement at each reporting period and a derivative asset or liability is recorded on our balance sheet.

Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. At June 30, 2019 and December 31, 2018 , our derivatives recorded at fair value in our unaudited Condensed Consolidated Balance Sheets consisted of the following:



	Derivative Assets				Derivative Liabilities
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
	(In thousands)
Commodities contracts — current(1)	$	935	$	11	$	666	$	4,328
Commodities contracts — non-current(2)	—		—		—		—
Total derivatives	$	935	$	11	$	666	$	4,328


(1)	Derivative assets and liabilities that have settlement dates equal to or less than 12 months from the respective balance sheet date are included in prepaid expenses and other current assets and accounts payable and accrued expenses, respectively, in our unaudited Condensed Consolidated Balance Sheets.


(2)	Derivative assets and liabilities that have settlement dates greater than 12 months from the respective balance sheet date are included in identifiable intangible and other assets, net and other long-term liabilities, respectively, in our unaudited Condensed Consolidated Balance Sheets.

Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, we follow a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:


•	Level 1 — Quoted prices for identical instruments in active markets.


•	Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.


•	Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 is as follows (in thousands):



	Fair Value as of June 30, 2019		Level 1		Level 2		Level 3
Asset — Commodities contracts	$	935	$	—	$	935	$	—
Liability — Commodities contracts	666		—		666		—

A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 is as follows (in thousands):



	Fair Value as of December 31, 2018		Level 1		Level 2		Level 3
Asset — Commodities contracts	$	11	$	—	$	11	$	—
Liability — Commodities contracts	4,328		—		4,328		—

Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on our Credit Facility, receivables securitization facility, and certain other debt are variable, their fair values approximate their carrying values.

The fair value of the 2023 Notes was determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined these fair values to be Level 2 measurements as all significant inputs into the quotes provided by our pricing source are observable in active markets. The following table presents the outstanding principal amount and fair value of the 2023 Notes at June 30, 2019 and December 31, 2018 :



	June 30, 2019				December 31, 2018
	Amount Outstanding		Fair Value		Amount Outstanding		Fair Value
	(In thousands)
Dean Foods Company senior notes due 2023	$	700,000	$	374,500	$	700,000	$	560,000

Additionally, we maintain a Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified deferred compensation arrangement for our executive officers and other employees earning compensation in excess of the maximum compensation that can be taken into account with respect to our 401(k) plan. The SERP is designed to provide these employees with retirement benefits from us that are equivalent, as a percentage of total compensation, to the benefits provided to other employees. The assets related to the SERP are primarily invested in money market and mutual funds and are held at fair value. We classify these assets as Level 2 as fair value can be corroborated based on quoted market prices for similar instruments in active markets. The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of June 30, 2019 (in thousands):



	Total		Level 1		Level 2		Level 3
Money market	$	3	$	—	$	3	$	—
Mutual funds	1,862		—		1,862		—

The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of December 31, 2018 (in thousands):



	Total		Level 1		Level 2		Level 3
Money market	$	6	$	—	$	6	$	—
Mutual funds	1,693		—		1,693		—

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9 . Common Stock and Share-Based Compensation

Our authorized shares of capital stock include one million shares of preferred stock and 250 million shares of common stock with a par value of $0.01 per share.

Cash Dividends — In accordance with our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. In February 2019, our Board of Directors reviewed the Company's dividend policy and determined that it would be in the best interest of the stockholders to suspend dividend payments. Consequently, no dividends were paid in the first six months of 2019 . From 2015 through 2018, all awards of restricted stock units, performance stock units and phantom shares provided for cash dividend equivalent units, which vested in cash at the same time as the underlying award. A quarterly dividend of $0.09 per share was paid in March and June 2018 , totaling approximately $16.4 million for the first six months of 2018 . Dividends are presented as a reduction to retained earnings in our unaudited Condensed Consolidated Statement of Stockholders’ Equity unless we have an accumulated deficit as of the end of the period, in which case they are reflected as a reduction to additional paid-in capital.

Stock Repurchase Program — Since 1998, our Board of Directors has from time to time authorized the repurchase of our common stock up to an aggregate of $2.38 billion , excluding fees and commissions. We made no share repurchases during the three and six months ended June 30, 2019 and 2018 . As of June 30, 2019 , $197.1 million remained available for repurchases under this program (excluding fees and commissions). Our management is authorized to purchase shares from time to time through open market transactions at prevailing prices or in privately-negotiated transactions, subject to market conditions and other factors. Shares, when repurchased, are retired.

Restricted Stock Units — We issue restricted stock units ("RSUs") to certain senior employees and non-employee directors as part of our long-term incentive compensation program. An RSU represents the right to receive one share of common stock in the future. RSUs have no exercise price. RSUs granted to employees generally vest ratably over three years , subject to certain accelerated vesting provisions based primarily on a change of control, or in certain cases upon death or qualified disability. RSUs granted to non-employee directors vest ratably over three years .

The following table summarizes RSU activity during the six months ended June 30, 2019 :



	Employees			Non-Employee Directors			Total
RSUs outstanding at January 1, 2019	840,431			140,539			980,970
RSUs granted	1,415,236			268,373			1,683,609
Shares issued upon vesting of RSUs	(198,935		)	(93,670		)	(292,605		)
RSUs canceled or forfeited(1)	(346,147		)	(17,528		)	(363,675		)
RSUs outstanding at June 30, 2019	1,710,585			297,714			2,008,299
Weighted average grant date fair value	$	4.76		$	4.84		$	4.77


(1)	Pursuant to the terms of our plans, employees have the option of forfeiting RSUs to cover their minimum statutory tax withholding when shares are issued. Any RSUs surrendered or canceled in satisfaction of participants’ tax withholding obligations are not available for future grants under the plans.

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Performance Stock Units — In 2016, we began granting performance stock units ("PSUs") as a part of our long-term incentive compensation program. PSUs cliff vest and settle in shares of our common stock at the end of a three -year performance period contingent upon the achievement of specific performance goals established for each calendar year during the performance period. The PSUs are deemed granted in three separate one year tranches on the dates in which our Compensation Committee establishes the applicable annual performance goals. The number of shares that may be earned at the end of the vesting period may range from zero to 200 percent of the target award amount based on the achievement of the performance goals. The fair value of PSUs is estimated using the market price of our common stock on the date of grant, and we recognize compensation expense ratably over the vesting period for the portion of the awards that are expected to vest. The fair value of the PSUs is remeasured at each reporting period. The following table summarizes PSU activity during the six months ended June 30, 2019 :



	PSUs		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	291,773		$	9.94
Granted	761,335		3.06
Vested	(26,734	)	18.93
Forfeited or canceled	(86,659	)	4.71
Performance adjustment(1)	(240,761	)	8.92
Outstanding at June 30, 2019	698,954		$	3.10


(1)	Represents an adjustment to the 2018 tranche of the 2016 , 2017 and 2018 PSU awards based on actual performance during the 2018 annual performance period in relation to the established performance goal for that period. The actual performance for the 2018 annual performance period was certified by the Compensation Committee of our Board of Directors in the first quarter of 2019 .

Phantom Shares — We grant phantom shares as part of our long-term incentive compensation program, which are similar to RSUs in that they are based on the price of our stock and vest ratably over a three -year period, but are cash-settled based upon the value of our stock at each vesting date. The fair value of the awards is remeasured at each reporting period. Compensation expense is recognized over the vesting period with a corresponding liability, which is recorded in accounts payable and accrued expenses in our unaudited Condensed Consolidated Balance Sheets. The following table summarizes the phantom share activity during the six months ended June 30, 2019 :



	Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	2,007,427		$	11.35
Granted	4,536,703		3.05
Converted/paid	(793,987	)	12.55
Forfeited	(711,805	)	5.67
Outstanding at June 30, 2019	5,038,338		$	4.49

Stock Options — The following table summarizes stock option activity during the six months ended June 30, 2019 :



	Options		Weighted Average Exercise Price		Weighted Average Contractual Life (Years)	Aggregate Intrinsic Value
Options outstanding and exercisable at January 1, 2019	385,538		$	14.55
Forfeited and canceled	(231,523	)	16.49
Options outstanding and exercisable at June 30, 2019	154,015		$	11.64	1.25	—

We recognize share-based compensation expense for stock options ratably over the vesting period. The fair value of each option award is estimated on the date of grant using a Black-Scholes valuation model. We did not grant any stock options during 2018 or 2019 , nor do we currently plan to in the future. At June 30, 2019 , there was no remaining unrecognized stock option expense related to unvested awards.

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Share-Based Compensation Expense — The following table summarizes the share-based compensation expense recognized during the three and six months ended June 30, 2019 and 2018 :



	Three Months Ended June 30					Six Months Ended June 30
	2019			2018		2019		2018
	(In thousands)
RSUs	$	1,345		$	1,399	$	2,083	$	2,545
PSUs	512			551		780		1,147
Phantom shares	(21		)	2,520		868		2,933
Total	$	1,836		$	4,470	$	3,731	$	6,625

10 . Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is based on the weighted average number of common shares outstanding during each period. Diluted EPS is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period. Stock option and stock unit conversions were not included in the computation of diluted loss per share for the three and six months ended June 30, 2019 and 2018 as we incurred a loss from continuing operations for these periods and any effect on loss per share would have been anti-dilutive. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:



	Three Months Ended June 30						Six Months Ended June 30
	2019			2018			2019			2018
	(In thousands, except share data)
Basic loss per share computation:
Numerator:
Loss from continuing operations	$	(64,863	)	$	(42,016	)	$	(126,690	)	$	(42,281	)
Net loss attributable to non-controlling interest	392			—			645			—
Loss from continuing operations attributable to Dean Foods Company	$	(64,471	)	$	(42,016	)	$	(126,045	)	$	(42,281	)
Denominator:
Average common shares	91,758,807			91,342,652			91,643,179			91,267,748
Basic loss per share from continuing operations attributable to Dean Foods Company	$	(0.70	)	$	(0.46	)	$	(1.38	)	$	(0.46	)
Diluted loss per share computation:
Numerator:
Loss from continuing operations	$	(64,863	)	$	(42,016	)	$	(126,690	)	$	(42,281	)
Net loss attributable to non-controlling interest	392			—			645			—
Loss from continuing operations attributable to Dean Foods Company	$	(64,471	)	$	(42,016	)	$	(126,045	)	$	(42,281	)
Denominator:
Average common shares — basic	91,758,807			91,342,652			91,643,179			91,267,748
Stock option conversion(1)	—			—			—			—
RSUs and PSUs(2)	—			—			—			—
Average common shares — diluted	91,758,807			91,342,652			91,643,179			91,267,748
Diluted loss per share from continuing operations attributable to Dean Foods Company	$	(0.70	)	$	(0.46	)	$	(1.38	)	$	(0.46	)
(1) Anti-dilutive options excluded	158,090			443,169			221,249			473,149
(2) Anti-dilutive stock units excluded	2,806,677			1,202,367			2,256,674			1,057,057

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11 . Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended June 30, 2019 were as follows (in thousands):



	Pension and Other Postretirement Benefits Items			Foreign Currency Items			Total
Balance at March 31, 2019	$	(91,698	)	$	(4,781	)	$	(96,479	)
Amounts reclassified from accumulated other comprehensive loss(1)	2,420			—			2,420
Net current-period other comprehensive income	2,420			—			2,420
Balance at June 30, 2019	$	(89,278	)	$	(4,781	)	$	(94,059	)


(1)	The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12 .

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended June 30, 2018 were as follows (in thousands):



	Pension and Other Postretirement Benefits Items			Foreign Currency Items			Total
Balance at March 31, 2018	$	(88,852	)	$	(4,781	)	$	(93,633	)
Other comprehensive income before reclassifications	3,210			—			3,210
Amounts reclassified from accumulated other comprehensive loss(1)	(1,608		)	—			(1,608		)
Net current-period other comprehensive income	1,602			—			1,602
Balance at June 30, 2018	$	(87,250	)	$	(4,781	)	$	(92,031	)


(1)	The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12 .

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the six months ended June 30, 2019 were as follows (in thousands):



	Pension and Other Postretirement Benefits Items			Foreign Currency Items			Total
Balance at December 31, 2018	$	(93,826	)	$	(4,781	)	$	(98,607	)
Amounts reclassified from accumulated other comprehensive loss(1)	4,548			—			4,548
Net current-period other comprehensive income	4,548			—			4,548
Balance at June 30, 2019	$	(89,278	)	$	(4,781	)	$	(94,059	)


(1)	The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12 .

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The changes in accumulated other comprehensive income (loss) by component, net of tax, during the six months ended June 30, 2018 were as follows (in thousands):



	Pension and Other Postretirement Benefits Items			Foreign Currency Items			Total
Balance at December 31, 2017	$	(73,629	)	$	(4,781	)	$	(78,410	)
Other comprehensive income before reclassifications	6,443			—			6,443
Amounts reclassified from accumulated other comprehensive loss(1)	(3,217		)	—			(3,217		)
Net current-period other comprehensive income	3,226			—			3,226
Reclassification of stranded tax effects related to the Tax Act(2)	(16,847		)	—			(16,847		)
Balance at June 30, 2018	$	(87,250	)	$	(4,781	)	$	(92,031	)


(1)	The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12 .


(2)	The accumulated other comprehensive loss reclassification is related to a one-time reclassification to retained earnings for the stranded tax effects associated with our pension and post-retirement benefit plans resulting from the Tax Cuts and Jobs Act ("Tax Act").

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12 . Employee Retirement and Postretirement Benefits

We sponsor various defined benefit and defined contribution retirement plans, including various employee savings and profit sharing plans, and contribute to various multiemployer pension plans on behalf of our employees. All full-time union and non-union employees who have met requirements pursuant to the plans are eligible to participate in one or more of these plans.

Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation. The following table sets forth the components of net periodic benefit cost for our defined benefit plans during the three and six months ended June 30, 2019 and 2018 :



	Three Months Ended June 30						Six Months Ended June 30
	2019			2018			2019			2018
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	672		$	732		$	1,344		$	1,464
Interest cost	3,084			2,828			6,168			5,656
Expected return on plan assets	(3,996		)	(4,411		)	(7,992		)	(8,822		)
Amortizations:
Prior service cost	108			108			216			216
Unrecognized net loss	2,440			2,130			4,880			4,260
Net periodic benefit cost	$	2,308		$	1,387		$	4,616		$	2,774

We do not expect to make any contributions to the company-sponsored pension plans in 2019.

Postretirement Benefits — Certain of our subsidiaries provide health care benefits to certain retirees who are covered under specific group contracts. The following table sets forth the components of net periodic benefit cost for our postretirement benefit plans during the three and six months ended June 30, 2019 and 2018 :



	Three Months Ended June 30						Six Months Ended June 30
	2019			2018			2019			2018
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	154		$	170		$	308		$	340
Interest cost	281			235			562			470
Amortizations:
Prior service cost	23			23			46			46
Unrecognized net gain	(151		)	(118		)	(302		)	(236		)
Net periodic benefit cost	$	307		$	310		$	614		$	620

13 . Asset Impairment Charges and Facility Closing and Reorganization Costs

Asset Impairment Charges

We evaluate our finite-lived intangible and long-lived assets for impairment when circumstances indicate that the carrying value may not be recoverable. Indicators of impairment could include, among other factors, significant changes in the business environment, the planned closure of a facility, or deteriorations in operating cash flows. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows.

Testing the assets for recoverability involves developing estimates of future cash flows directly associated with, and that are expected to arise as a direct result of, the use and eventual disposition of the assets. Other inputs are based on assessment of an individual asset’s alternative use within other production facilities, evaluation of recent market data and historical liquidation sales values for similar assets. As the inputs for testing recoverability are largely based on management’s judgments and are not generally observable in active markets, we consider such measurements to be Level 3 measurements in the fair value hierarchy. See Note 8 .

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The results of our analysis indicated an impairment to our property, plant and equipment outside of facility closing and reorganization costs at two of our production facilities of $11.9 million during the six months ended June 30, 2019 and at one production facility of $2.2 million during the six months ended June 30, 2018 , respectively. The impairments were the result of declines in profitability both on a historical and forecasted basis.

We can provide no assurance that we will not have impairment charges in future periods as a result of changes in our business environment, operating results or the assumptions and estimates utilized in our impairment tests.

Facility Closing and Reorganization Costs

Costs associated with approved plans within our ongoing network optimization and reorganization strategies are summarized as follows:



	Three Months Ended June 30				Six Months Ended June 30
	2019		2018		2019		2018
	(In thousands)
Closure of facilities, net(1)	$	3,300	$	59,229	$	6,323	$	61,591
Organizational effectiveness(2)	—		—		—		(331		)
Enterprise-wide cost productivity plan(3)	4,100		8,432		5,409		14,863
Facility closing and reorganization costs, net	$	7,400	$	67,661	$	11,732	$	76,123

(1)

Reflects charges, net of gains on the sales of assets, associated with closed facilities that were incurred in 2019 and 2018 . These charges are primarily related to facility closures in Braselton, GA; Louisville, KY; Erie, PA; Huntley, IL; Thief River Falls, MN; Lynn, MA; Livonia, MI; Richmond, Virginia; Orem, Utah; New Orleans, Louisiana; Rochester, Indiana; Riverside, California; Denver, Colorado; and Buena Park, California. The net gain during the three months ended June 30, 2019 was primarily due to gains from the sale of properties for which we recognized restructuring charges in previous periods. We have incurred net charges to date of $118.2 million related to these facility closures through June 30, 2019 . We expect to incur additional charges related to these facility closures of approximately $1.3 million related to shutdown, contract termination and other costs.

(2)

During 2017, we initiated a company-wide, multi-phase organizational effectiveness assessment to better align each key function of the Company with our strategic plan. This initiative has resulted in headcount reductions due to changes to our organizational structure, and the charges shown in the table above are primarily comprised of severance benefits and other employee-related costs associated with these organizational changes. We do not expect to incur any material additional costs associated with this initiative.

(3)

In the fourth quarter of 2017, we announced an enterprise-wide cost productivity plan, which includes rescaling our supply chain, optimizing spend management and integrating our operating model. This plan has resulted in headcount reductions due to changes to our organizational structure, and the charges shown in the table above are primarily comprised of severance benefits and other employee-related costs associated with these changes. Efforts with respect to the enterprise-wide cost productivity plan are ongoing, and we expect that we will incur additional costs in the coming months associated with the approval and implementation of additional phases of the plan; however, as specific details of these phases have not been finalized and approved, future costs are not yet estimable.

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Activity with respect to facility closing and reorganization costs during the six months ended June 30, 2019 is summarized below and includes items expensed as incurred:



	Accrued Charges at December 31, 2018		Charges and Adjustments			Payments			Accrued Charges at June 30, 2019
	(In thousands)
Cash charges:
Workforce reduction costs	$	13,213	$	4,270		$	(6,905	)	$	10,578
Shutdown costs	—		5,290			(5,290		)	—
Lease obligations after shutdown	1,368		120			(723		)	765
Other	—		1,549			(1,549		)	—
Subtotal	$	14,581	11,229			$	(14,467	)	$	11,343
Non-cash charges:
Write-down of assets (1)			2,139
Gain on sale/disposal of related assets			(1,730		)
Other, net			94
Subtotal			503
Total			$	11,732

(1) The write-down of assets relates primarily to owned buildings, land and equipment of previously closed facilities. The assets were tested for recoverability at the time the decision to close the facilities was more likely than not to occur. Over time, refinements to our estimates used in testing for recoverability may result in additional asset write-downs. The write-down of assets can include accelerated depreciation recorded for those facilities previously closed. Our methodology for testing the recoverability of the assets is consistent with the methodology described in the "Asset Impairment Charges" section above.

14 . Commitments and Contingencies

Contingent Obligations Related to Divested Operations — We have divested certain businesses in recent years. In each case, we have retained certain known contingent obligations related to those businesses and/or assumed an obligation to indemnify the purchasers of the businesses for certain unknown contingent liabilities, including environmental liabilities. We believe that we have established adequate reserves, which are immaterial to the financial statements, for potential liabilities and indemnifications related to our divested businesses. Moreover, we do not expect any liability that we may have for these retained liabilities, or any indemnification liability, to materially exceed amounts accrued.

Contingent Obligations Related to Milk Supply Arrangements — On December 21, 2001, in connection with our acquisition of Legacy Dean, we purchased Dairy Farmers of America’s (“DFA”) 33.8% interest in our operations. In connection with that transaction, we issued a contingent, subordinated promissory note to DFA in the original principal amount of $40 million . The promissory note has a 20 -year term that bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million . We may prepay the note in whole or in part at any time, without penalty. The note will become payable only if we materially breach or terminate our milk supply agreement with DFA without renewal or replacement. Otherwise, the note will expire in 2021 , without any obligation to pay any portion of the principal or interest. Payments made under the note, if any, would be expensed as incurred. We have not terminated, and we have not materially breached, our milk supply agreement with DFA related to the promissory note. In connection with our continued focus on cost control and increased supply chain efficiency, we continue to evaluate our sources of raw milk supply.

Insurance — We use a combination of insurance and self-insurance for a number of risks, including property, workers’ compensation, general liability, automobile liability, product liability and employee health care utilizing high deductibles. Deductibles vary due to insurance market conditions and risk. Liabilities associated with these risks are estimated considering historical claims experience and other actuarial assumptions. Based on current information, we believe that we have established adequate reserves to cover these claims.

Lease and Purchase Obligations — We lease certain property, plant and equipment used in our operations under both capital and operating lease agreements. Such leases, which are primarily for machinery, equipment and vehicles, including our distribution fleet, have lease terms ranging from one to 20 years. Certain of the operating lease agreements require the payment

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of additional rentals for maintenance, along with additional rentals based on miles driven or units produced. Certain leases require us to guarantee a minimum value of the leased asset at the end of the lease. Our maximum exposure under those guarantees is not a material amount. See further discussion of our lease obligations within Note 6 .

We have entered into various contracts, in the normal course of business, obligating us to purchase minimum quantities of raw materials used in our production and distribution processes, including conventional raw milk, diesel fuel, sugar and other ingredients that are inputs into our finished products. We enter into these contracts from time to time to ensure a sufficient supply of raw ingredients. In addition, we have contractual obligations to purchase various services that are part of our production process.

Litigation, Investigations and Audits — We are party from time to time to certain pending or threatened legal proceedings in the ordinary course of our business. Potential liabilities associated with these matters are not expected to have a material adverse impact on our financial position, results of operations, or cash flows.

15 . Segment, Geographic and Customer Information

We operate as a single reportable segment in manufacturing, marketing, selling and distributing a wide variety of branded and private label dairy and dairy case products. We operate 58 manufacturing facilities which are geographically located largely based on local and regional customer needs and other market factors. We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our products are primarily delivered through what we believe to be one of the most extensive refrigerated DSD systems in the United States. Our Chief Executive Officer evaluates the performance of our business based on operating income or loss and operating cash flows before facility closing and reorganization costs, litigation settlements, impairments of long-lived assets, gains and losses on the sale of businesses and certain other non-recurring gains and losses.

Geographic Information — Net sales related to our foreign operations comprised less than 1% of our consolidated net sales during each of the three and six months ended June 30, 2019 and 2018 . None of our long-lived assets are associated with our foreign operations.

Significant Customers — Our largest customer accounted for approximately 14.8% and 15.6% of our consolidated net sales in the three months ended June 30, 2019 and 2018 , respectively and accounted for 14.4% and 16.1% of our consolidated net sales in the six months ended June 30, 2019 and 2018 , respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are predictions based on our current expectations and our projections about future events, and are not statements of historical fact. Forward-looking statements include statements concerning our business strategy, among other things, including anticipated trends and developments in, and management plans for, our business and the markets in which we operate. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue,” the negative or plural of these words and other comparable terminology. All forward-looking statements included in this Form 10-Q are based upon information available to us as of the filing date of this Form 10-Q, and we undertake no obligation to update any of these forward-looking statements for any reason. You should not place undue reliance on these forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 (the " 2018 Annual Report on Form 10-K"), as updated herein, and elsewhere in this Form 10-Q. You should carefully consider the risks and uncertainties described under these sections.

Recent Developments

Leadership Changes

On July 26, 2019, we announced that Eric Beringause will serve as the Company's new President and Chief Executive Officer effective July 29, 2019, replacing Ralph Scozzafava. Mr. Scozzafava will receive compensation and benefits pursuant to the Company’s Amended and Restated Executive Severance Pay Plan following his termination of employment. Mr. Beringause previously served as the Chief Executive Officer of Gehl Foods, LLC from March 2015 to August 2018, as Chief Executive Officer of Advanced Refreshment LLC from 2011 to 2014, and President and Chief Executive Officer of Sturm Foods, Inc. from 2008 to 2011.

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Results of Operations

Our key performance indicators are brand mix and achieving low cost, which are reflected in gross margin and operating income, respectively. We evaluate our financial performance based on operating income or loss and cash flow from operations before facility closing and reorganization costs, asset impairment charges and other nonrecurring gains and losses. The following table presents certain information concerning our financial results, including information presented as a percentage of net sales:



	Three Months Ended June 30										Six Months Ended June 30
	2019					2018					2019					2018
	Dollars			Percent		Dollars			Percent		Dollars			Percent		Dollars			Percent
	(Dollars in millions)
Net sales	$	1,843.5		100.0	%	$	1,951.2		100.0	%	$	3,638.9		100.0	%	$	3,931.7		100.0	%
Cost of sales	1,464.0			79.4		1,518.4			77.8		2,885.7			79.3		3,050.4			77.6
Gross profit(1)	379.5			20.6		432.8			22.2		753.2			20.7		881.3			22.4
Operating costs and expenses:
Selling and distribution	335.9			18.2		336.7			17.3		673.6			18.5		682.7			17.4
General and administrative	71.4			3.9		66.0			3.3		144.5			4.0		141.5			3.5
Amortization of intangibles	5.2			0.3		5.1			0.3		10.3			0.3		10.2			0.3
Facility closing and reorganization costs, net	7.4			0.4		67.7			3.5		11.7			0.3		76.1			1.9
Impairment of long-lived assets	11.9			0.6		2.2			0.1		11.9			0.3		2.2			0.1
Other operating income	—			—		(2.3		)	(0.1	)	—			—		(2.3		)	(0.1	)
Equity in (earnings) loss of unconsolidated affiliate	(0.7		)	—		(1.7		)	(0.1	)	(2.6		)	(0.1	)	(3.6		)	(0.1	)
Total operating costs and expenses	431.1			23.4		473.7			24.3		849.4			23.3		906.8			23.0
Operating loss	$	(51.6	)	(2.8	)%	$	(40.9	)	(2.1	)%	$	(96.2	)	(2.6	)%	$	(25.5	)	(0.6	)%


(1)	As disclosed in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales.

Quarter Ended June 30, 2019 Compared to Quarter Ended June 30, 2018

Net Sales — The change in net sales was due to the following:



	Three Months Ended June 30, 2019 vs. 2018
	(In millions)
Volume	$	(244.9	)
Pricing and product mix changes	132.0
Acquisitions	5.2
Total decrease	$	(107.7	)

Net sales decrease d $ 107.7 million , or 5.5 %, during the second quarter of 2019 as compared to the second quarter of 2018 , primarily due to fluid milk volume declines from year-ago levels, partly offset by increased pricing, as a result of increases in dairy commodity costs from year-ago levels and pricing actions taken during the second quarter of 2019 to offset inflation. On average, during the second quarter of 2019 , the Class I price was 12.5% above prior-year levels. Fluid milk volume declines were driven predominantly by the loss of volume from two large retailers, overall category declines and other volume pressure. Net sales declines were further offset by volumes associated with the acquisition and consolidation of Good Karma into our unaudited Condensed Consolidated Financial Statements on June 29, 2018, which contributed $ 5.2 million to net sales in the second quarter of 2019 .

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We generally increase or decrease the prices of our private label fluid dairy products on a monthly basis in correlation with fluctuations in the costs of raw materials, packaging supplies and delivery costs. We manage the pricing of our branded fluid milk products on a longer-term basis, balancing consumer demand with net price realization, but in some cases, we are subject to the terms of our sales agreements with respect to the means and/or timing of price increases, which can negatively impact our profitability. The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for the second quarter of 2019 compared to the second quarter of 2018 :



	Three Months Ended June 30*
	2019		2018		% Change
Class I mover(1)	$	16.42	$	14.60	12.5	%
Class I raw skim milk mover(1)(2)	7.75		6.05		28.1
Class I butterfat mover(2)(3)	2.55		2.50		2.0
Class II raw skim milk minimum(1)(4)	7.91		5.73		38.0
Class II butterfat minimum(3)(4)	2.60		2.61		(0.4	)

The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus producer premiums and a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes procurement costs and other related charges that vary by location and supplier. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” in our 2018 Annual Report on Form 10-K and “— Known Trends and Uncertainties — Conventional Raw Milk and Other Inputs” below for a more complete description of raw milk pricing.


(1)	Prices are per hundredweight.


(2)	We process Class I raw skim milk and butterfat into fluid milk products.


(3)	Prices are per pound.


(4)	We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Cost of sales decrease d $54.4 million , or 3.6% , in the second quarter of 2019 as compared to the second quarter of 2018 , primarily due to the volume declines discussed above. This overall decrease was partly offset by higher dairy commodity costs. On average, the Class I price was 12.5% above prior-year levels.

Gross Margin — Our gross margin decrease d to 20.6% in the second quarter of 2019 as compared to 22.2% in the second quarter of 2018 . The decrease was primarily due to the volume deleverage and Class I raw milk inflation discussed above.

Operating Costs and Expenses — Operating costs and expenses decrease d $42.6 million , or 9.0% , in the second quarter of 2019 as compared to the second quarter of 2018 . Significant changes to operating costs and expenses in the second quarter of 2019 as compared to the second quarter of 2018 include the following:


•	Selling and distribution costs decrease d by $0.8 million during the second quarter of 2019 primarily due to decreases in advertising and marketing costs of approximately $7.8 million, partially offset by increased employee-related costs of approximately $6.6 million.


•	General and administrative costs increase d by $5.4 million during the second quarter of 2019 primarily due to increases in professional fees and employee-related costs.


•	Facility closing and reorganization costs, net decrease d by $60.3 million during the second quarter of 2019 . See Note 13 to our unaudited Condensed Consolidated Financial Statements.


•	We recorded impairment charges to our long-lived assets of $11.9 million during the second quarter of 2019 compared to $2.2 million during the second quarter of 2018 . See Note 13 to our unaudited Condensed Consolidated Financial Statements.


•	We recorded $0.7 million of equity in the earnings of our Organic Valley Fresh joint venture during the second quarter of 2019 . See Note 3 to our unaudited Condensed Consolidated Financial Statements.

Other Expense — Other expense increase d $2.8 million during the second quarter of 2019 as compared to the second quarter of 2018 . This increase was primarily due to higher interest expense related to the write off of deferred financing costs for $3.8 million and increased borrowings under our receivables securitization facility.

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Income Taxes — Income tax benefit of $4.5 million was recorded at an effective rate of 6.5% for the second quarter of 2019 compared to $13.7 million at a 24.6% effective tax rate for the second quarter of 2018 . Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In the second quarter of 2019 , the Company recorded a discrete tax benefit of $1.0 million, primarily related to a net operating loss carryback. Excluding the impact of these discrete items, our effective tax rate for the second quarter of 2019 was 4.7%. Additional federal and state valuation allowances of $5.7 million were recorded as part of the annual effective tax rate.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

Net Sales — The change in net sales was due to the following:



	Six Months Ended June 30, 2019 vs. 2018
	(In millions)
Volume	$	(524.1	)
Pricing and product mix changes	221.5
Acquisitions	9.8
Total decrease	$	(292.8	)

Net sales decrease d $ 292.8 million , or 7.4 %, during the first six months of 2019 as compared to the first six months of 2018 , primarily due to fluid milk volume declines from year-ago levels, partly offset by increased pricing, as a result of increases in dairy commodity costs from year-ago levels and pricing actions taken during the first six months of 2019 to offset inflation. On average, during the first six months of 2019 , the Class I price was 17.8% above prior-year levels. Fluid milk volume declines were driven predominantly by the loss of volume from two large retailers, overall category declines and lower branded fluid milk volumes due to continued retailer investment in private label products. Net sales declines were further offset by volumes associated with the acquisition and consolidation of Good Karma into our unaudited Condensed Consolidated Financial Statements on June 29, 2018, which contributed $ 9.8 million to net sales in the first six months of 2019 .

The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for the first six months of 2019 compared to the first six months of 2018 :



	Six Months Ended June 30*
	2019		2018		% Change
Class I mover(1)	$	17.05	$	14.47	17.8	%
Class I raw skim milk mover(1)(2)	8.17		6.04		35.3
Class I butterfat mover(2)(3)	2.62		2.47		6.1
Class II raw skim milk minimum(1)(4)	8.21		5.64		45.6
Class II butterfat minimum(3)(4)	2.67		2.51		6.4


(1)	Prices are per hundredweight.


(2)	We process Class I raw skim milk and butterfat into fluid milk products.


(3)	Prices are per pound.


(4)	We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Cost of sales decrease d $164.7 million , or 5.4% , in the first six months of 2019 as compared to the first six months of 2018 , primarily due to the volume declines discussed

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above. This overall decrease was partly offset by higher dairy commodity costs. On average, the Class I price was 17.8% above prior-year levels.

Gross Margin — Our gross margin decrease d to 20.7% in the first six months of 2019 as compared to 22.4% in the first six months of 2018 . The decrease was primarily due to the volume deleverage and Class I raw milk inflation discussed above.

Operating Costs and Expenses — Operating costs and expenses decrease d $57.5 million , or 6.3% , in the first six months of 2019 as compared to the first six months of 2018 . Significant changes to operating costs and expenses in the first six months of 2019 as compared to the first six months of 2018 include the following:


•	Selling and distribution costs decrease d by $9.2 million during the first six months of 2019 primarily due to decreases in advertising and marketing costs of approximately $12.4 million, partially offset by increased employee-related costs of approximately $2.5 million.


•	General and administrative costs increase d by $3.0 million during the first six months of 2019 primarily due to increases in professional fees, partially offset by decreases in employee-related costs related to lower headcount.


•	Facility closing and reorganization costs, net decrease d by $64.4 million during the first six months of 2019 . See Note 13 to our unaudited Condensed Consolidated Financial Statements.


•	We recorded impairment charges to our long-lived assets of $11.9 million during the first six months of 2019 compared to $2.2 million during the first six months of 2018 . See Note 13 to our unaudited Condensed Consolidated Financial Statements.


•	We recorded $2.6 million of equity in the earnings of our Organic Valley Fresh joint venture during the first six months of 2019 . See Note 3 to our unaudited Condensed Consolidated Financial Statements.

Other Expense — Other expense increase d $7.6 million during the first six months of 2019 as compared to the first six months of 2018 . This increase was primarily due to higher interest expense related to the write off of deferred financing costs for $3.8 million and increased borrowings under our receivables securitization facility.

Income Taxes — Income tax benefit of $6.4 million was recorded at an effective rate of 4.8% for the first six months of 2019 compared to $12.6 million at a 23.0% effective tax rate for the first six months of 2018 . Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In the first six months of 2019 , the Company recorded a discrete tax expense of $2.5 million, primarily related to the state valuation allowance. Excluding the impact of these discrete items, our effective tax rate for the first six months of 2019 was 6.7%. Additional federal and state valuation allowances of $20.3 million were recorded as part of the annual effective tax rate.

Liquidity and Capital Resources

We believe that our cash on hand coupled with future cash flows from operations and other available sources of liquidity, including our senior secured revolving credit facility and our receivables securitization facility, will provide sufficient liquidity to allow us to meet our cash requirements for at least the next twelve months. Our anticipated uses of cash for the remainder of 2019 include costs to execute our enterprise-wide cost productivity plan and other strategic initiatives; capital expenditures; working capital; financial obligations, including tax payments and property and casualty insurance requirements; and other costs that may be necessary to invest, to operate, and to grow our business. We are also authorized to repurchase shares of our common stock pursuant to a stock repurchase program authorized by our Board of Directors. Additionally, on an ongoing basis, we evaluate and consider strategic acquisitions, divestitures, joint ventures, or other transactions to create shareholder value and enhance financial performance.

The Senior Secured Revolving Credit Facility has an expansion feature which allows us to increase the total size of the facility from $265 million to $350 million. We are currently seeking additional sources of financing to exercise this expansion feature to increase our liquidity. We may also, from time to time, raise additional funds through new debt facilities, borrowings, or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.

As of June 30, 2019 , we had total cash and cash equivalents on hand of $20.9 million , of which $1.1 million was attributable to our foreign operations. Historically, the cash held by our foreign subsidiary was reinvested indefinitely and was generally subject to U.S. income tax only upon repatriation to the U.S. However, the Tax Cuts and Jobs Act (the "Tax Act") required us to incur a one-time transition tax in 2017 on cumulative undistributed foreign earnings for which we had not previously provided

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U.S. taxes. We analyzed our foreign working capital and cash requirements and the potential tax liabilities that would be attributable to a repatriation of previously taxed earnings. In the second quarter 2018, we repatriated $9.9 million of cash resulting in no additional tax expense. Additionally, we will not consider the future earnings of our foreign subsidiary to be permanently reinvested and have determined that any tax effects resulting from this change would be immaterial.

At June 30, 2019 , we had $ 989.0 million of long-term debt obligations, excluding unamortized debt issuance costs of $4.0 million , and $146.9 million of combined available future borrowing capacity under our senior secured revolving credit facility and receivables securitization facility, subject to compliance with the covenants in our credit agreements.

Cash Dividends — In accordance with our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. In February 2019, our Board of Directors reviewed the Company's dividend policy and determined that it would be in the best interest of the stockholders to suspend dividend payments. Consequently, no dividends were paid in the first three months of 2019. From 2015 to 2018, all awards of restricted stock units, performance stock units and phantom shares provide for cash dividend equivalent units, which vest in cash at the same time as the underlying award. A quarterly dividend of $0.09 per share was paid in March and June 2018 , totaling approximately $16.4 million for the first six months of 2018 . Dividends are presented as a reduction to retained earnings in our unaudited Condensed Consolidated Statement of Stockholders’ Equity unless we have an accumulated deficit as of the end of the period, in which case they are reflected as a reduction to additional paid-in capital. See Note 9 to our unaudited Condensed Consolidated Financial Statements.

Senior Secured Revolving Credit Facility — On February 22, 2019 , we entered into that certain Credit Agreement, by and among the Company, Coöperatieve Rabobank U.A., New York Branch, as administrative agent, and the lenders party thereto (the “Credit Agreement”), pursuant to which the lenders party thereto have provided us with a senior secured revolving borrowing base credit facility with a maximum facility amount of up to $265 million (the “Credit Facility”). Borrowings under the Credit Facility are limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount is equal to 65% of the appraised value of certain of our real property and equipment. We have currently elected to include real estate and equipment with appraised values sufficient to support a borrowing base of $265 million . However, our ability to access the full borrowing base is limited by the requirement under the Credit Agreement to maintain liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) in an amount equal to 50% of the borrowing base under the Credit Facility. The Credit Facility matures on February 22, 2024 , with a September 15, 2022 springing maturity date in the event the 2023 Notes are not refinanced or repaid on or prior to July 15, 2022 . A portion of the Credit Facility is available for the issuance of up to $25 million of standby letters of credit and up to $10 million of swing line loans.

Loans outstanding under the Credit Facility bear interest, at the Company’s option, at either: (i) the Base Rate (as defined in the Credit Agreement) or (ii) the Adjusted Eurodollar Rate (as defined in the Credit Agreement), plus a margin ranging between 1.25% and 1.75% (in the case of Base Rate loans) or 2.25% and 2.75% (in the case of Eurodollar Rate loans), in each case based on the Company’s total net leverage ratio at such time.

We may make optional prepayments of the loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, and with a 50% commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds relating to the assets not included in the borrowing base. The Credit Facility is guaranteed by our existing and future wholly owned material domestic subsidiaries, which are substantially all of our existing domestic subsidiaries other than the subsidiaries who are sellers under the Receivables Securitization Facility.

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Dean Foods Receivables Securitization Facility — We have a $450 million receivables securitization facility (the "Receivables Securitization Facility") pursuant to which certain of our subsidiaries sell their accounts receivable to two wholly-owned entities intended to be bankruptcy-remote, as is customary for receivables securitization facilities. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our unaudited Condensed Consolidated Balance Sheets, and the Receivables Securitization Facility is treated as a borrowing for accounting purposes.

On January 17, 2019 , we amended and restated the existing receivables purchase agreement ("Receivables Purchase Agreement") governing our Receivables Securitization Facility to, among other things, (i) waive compliance with the financial covenant in the Receivables Purchase Agreement requiring the Company to maintain a total net leverage ratio (as defined in the Receivables Purchase Agreement) of less than or equal to 4.25 to 1.00 for the test period ended December 31, 2018 (the “Financial Covenant”) and (ii) any cross default under the Receivables Purchase Agreement arising from non-compliance with the Financial Covenant under the prior Credit Facility.

On February 22, 2019 , we amended and restated the Receivables Purchase Agreement to extend the liquidity termination date. The Receivables Purchase Agreement contains covenants consistent with those contained in the Credit Agreement.

Based on the monthly borrowing base formula, we had the ability to borrow up to $428.8 million of the total commitment amount under the receivables securitization facility as of June 30, 2019 . The total amount of receivables sold to these entities as of June 30, 2019 was $496.5 million . During the first six months of 2019 , we borrowed $0.6 billion and repaid $0.5 billion under the facility with a remaining balance of $280.0 million as of June 30, 2019 . In addition to letters of credit in the aggregate amount of $147.9 million that were issued but undrawn, the remaining available borrowing capacity was $0.9 million at June 30, 2019 . Our average daily balance under this facility during the six months ended June 30, 2019 was $265.1 million . The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.

At August 5, 2019, we had $316.8 million of outstanding borrowings under the Credit Facility and the receivables securitization facility, excluding letters of credit in the aggregate amount of $153.5 million that were issued but undrawn.

Covenant Compliance — We are required to comply with a springing fixed charge coverage ratio set at 1.05 to 1.00, which is triggered and applicable in the event our liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) at such time is less than 50% of the borrowing base under the Credit Facility (or, at any time prior to inclusion of certain equipment and real property, less than $100 million). As of June 30, 2019 , we are not subject to the fixed charge coverage covenant.

Dean Foods Company Senior Notes due 2023 — On February 25, 2015, we issued $700 million in aggregate principal amount of 6.50% senior notes due 2023 (the “2023 Notes”) at an issue price of 100% of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act.

The 2023 Notes will mature on March 15, 2023, and bear interest at an annual rate of 6.50% . Interest on the 2023 Notes is payable semi-annually in arrears in March and September of each year.

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The carrying value under the 2023 Notes at June 30, 2019 was $696.0 million , net of unamortized debt issuance costs of $4.0 million .

Historical Cash Flow

The following table summarizes our cash flows from operating, investing and financing activities:



	Six Months Ended June 30
	2019			2018			Change
	(In thousands)
Cash flows from:
Operating activities	$	(29,206	)	$	120,760		$	(149,966	)
Investing activities	(40,351		)	(38,198		)	(2,153		)
Financing activities	66,328			(73,640		)	139,968
Net increase (decrease) in cash and cash equivalents	$	(3,229	)	$	8,922		$	(12,151	)

Operating Activities

Cash used in operating activities change d by $150.0 million in the six months ended June 30, 2019 compared to the six months ended June 30, 2018 . The decrease was primarily attributable to lower operating income and higher dairy commodity costs, as well as an increased investment in inventory.

Investing Activities

Cash used in investing activities increase d by $2.2 million in the six months ended June 30, 2019 compared to the six months ended June 30, 2018 . In the first six months of 2019 , capital expenditures increased by $7.7 million and proceeds from the sale of fixed assets decreased by $7.8 million in comparison to the prior period. The increase was partially offset by the purchase price, net of cash acquired, of $13.3 million paid for the Good Karma acquisition, which closed in the second quarter of 2018.

Financing Activities

Cash provided by financing activities was $66.3 million in the six months ended June 30, 2019 compared to cash used in financing activities of $73.6 million in the six months ended June 30, 2018 . This change was primarily attributable to net debt proceeds of $76.3 million in the first six months of 2019 as compared to net debt repayments of $56.8 million in the first six months of 2018 . Net debt proceeds were partially offset by payments of financing costs related to the amendments to our Credit Agreement and receivables purchase agreement of $9.6 million in the first six months of 2019 .

Contractual Obligations

There have been no material changes outside the ordinary course of business to the information provided with respect to our contractual obligations, including indebtedness and purchase and lease obligations, as disclosed in our 2018 Annual Report on Form 10-K.

Other Long-Term Liabilities

We offer pension benefits through various defined benefit pension plans and also offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees. Reported costs of providing non-contributory defined pension benefits and other postretirement benefits are dependent upon numerous factors, assumptions and estimates. For example, these costs are impacted by actual employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plan and earnings on plan assets. Pension and postretirement costs also may be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and annual periodic pension costs.

We did not make a discretionary contribution to our company-sponsored pension plans during the three months ended June 30, 2019 and do not expect to make any contributions to our company-sponsored pension plans for the remainder of 2019.

Other Commitments and Contingencies

In 2001, in connection with our acquisition of Legacy Dean, we purchased Dairy Farmers of America’s (“DFA”) 33.8% interest in our operations. In connection with that transaction, we issued a contingent, subordinated promissory note to

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DFA in the original principal amount of $40 million . The promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will become payable only if we materially breach or terminate our related milk supply agreement with DFA without renewal or replacement. Otherwise, the note will expire in 2021, without any obligation to pay any portion of the principal or interest. Payments made under the note, if any, would be expensed as incurred. We have not terminated, and we have not materially breached, any of our related milk supply agreements with DFA related to the promissory note. In connection with our goals of cost control and supply chain efficiency, we continue to evaluate our sources of raw milk supply.

We also have the following commitments and contingent liabilities, in addition to contingent liabilities related to ordinary course litigation, investigations and audits:


•	certain indemnification obligations related to businesses that we have divested;


•	certain lease obligations, which require us to guarantee the minimum value of the leased asset at the end of the lease;


•	selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims and other casualty losses;


•	certain obligations, which require us to issue letters of credit for our property and casualty insurance risks; and


•	certain litigation-related contingencies.

See Note 14 to our unaudited Condensed Consolidated Financial Statements.

Future Capital Requirements

During 2019 , we intend to invest a total of approximately $95 million to $115 million in capital expenditures, primarily in support of our enterprise-wide cost productivity plan, other strategic initiatives and for our existing manufacturing facilities. For 2019, we expect cash interest to be approximately $64 million based upon current debt levels and projected forward interest rates under our Credit Facility and receivables securitization facility. Cash interest excludes amortization of deferred financing fees of approximately $3 million.

Known Trends and Uncertainties

Competitive Environment, Volume Performance and Enterprise-Wide Cost Productivity Plan

The fluid milk industry remains highly competitive, and we are currently navigating a number of challenging dynamics across our cost structure, volumes, customers, consumers and product mix. We continue to navigate a rapidly-changing industry landscape and a dynamic retail environment. Within private label fluid milk, competition for volume has increased significantly, and in some cases, we have lost volume. As a result, we have experienced increased levels of volume deleverage that have negatively impacted our operating income. In addition, retailers continue to aggressively price their private label products, which we believe negatively impacts our branded product sales, resulting in compressed margins.

During the six months ended June 30, 2019 , we experienced fluid milk volume declines from year-ago levels, driven predominantly by the loss of volume from two large retailers, overall category declines and other volume pressures and lower branded fluid milk volumes due to continued retailer investment in private label products. We expect volume and mix challenges to continue for the remainder of 2019. The effects of the volume declines on our operating results are being compounded by our accelerated facility closure activity. With the impact of the lost volumes, production cost declines lagged the decline in volumes, resulting in lower overall operating results. While we continue to be impacted by these increased costs related to our accelerated facility closure activity, we are experiencing improvement and we expect these costs to continue to stabilize as we move forward in 2019.

We are executing an aggressive enterprise-wide cost productivity plan to significantly reset our cost structure with targeted cost savings incremental to our annual productivity savings. We currently have legacy processes and systems that are fragmented and decentralized in many areas, which has created a cost structure that is disproportionately sensitive to small percentage declines in volume. We have organized our enterprise-wide cost productivity plan into three targeted work streams: rescaling our supply chain, optimizing spend management and integrating our operating model. We believe this plan is necessary to support our business strategy and deliver more consistent earnings and cash flow over the long term. The plan is phased over

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several years and requires significant one-time investments, including investments in people, infrastructure, technology and systems, which will negatively impact our profitability and cash flows.

Due to the phased implementation and timing of our initiatives and investments, we do not expect to generate enough cost savings in 2019 to offset the planned investments, cost inflation and overall volume pressures. In addition, inflation, declining volumes and competitive pricing pressures have negated, and may continue to negate, some of the impact of our cost saving efforts. Furthermore, some of our counterparties could attempt to modify their terms with us due to our financial performance.We also must execute our plans within our projected time frames in order to meet our financial projections and to remain competitive in the marketplace. In addition, if we continue to experience deteriorations in our profitability and cash flows, we may incur material asset impairments in the future. For further discussion of the risks relating to our cost productivity plan, see “Part I - Item 1A. Risk Factors - Business, Competitive and Strategic Risks - We may not realize anticipated benefits from our enterprise-wide cost productivity plan, and we may not complete this plan within our projected time frames, either of which could materially adversely impact our business, financial condition, results of operations and cash flows" in our 2018 Annual Report on Form 10-K.

Conventional Raw Milk and Other Inputs

Conventional Raw Milk and Butterfat — The primary raw materials used in the products we manufacture, distribute and sell are conventional raw milk (which contains both raw skim milk and butterfat) and bulk cream. On a monthly basis, the federal government and certain state governments set minimum prices for raw milk. The regulated minimum prices differ based on how the raw milk is utilized. Raw milk processed into fluid milk is priced at the Class I price and raw milk processed into products such as cottage cheese, creams and creamers, ice cream and sour cream is priced at the Class II price. Generally, we pay the federal minimum prices for raw milk, plus certain producer premiums (or “over-order” premiums) and location differentials. We also incur other raw milk procurement costs in some locations (such as hauling and field personnel). A change in the federal minimum price does not necessarily mean an identical change in our total raw milk costs as over-order premiums may increase or decrease. This relationship is different in every region of the country and can sometimes differ within a region based on supplier arrangements. However, in general, the overall change in our raw milk costs can be linked to the change in federal minimum prices. Because our Class II products typically have a higher fat content than that contained in raw milk, we also purchase bulk cream for use in some of our Class II products. Bulk cream is typically purchased based on a multiple of the Grade AA butter price on the Chicago Mercantile Exchange.

Prices for conventional raw milk during the second quarter of 2019 were approximately 12% higher than year-ago levels and increased approximately 6% sequentially from the first quarter of 2019. We expect raw milk inflation in the third quarter of 2019 and are currently projecting full-year dairy commodity inflation. Commodity price changes primarily impact our branded business as the changes in raw milk costs are essentially a pass-through cost on our private label products. Given the multitude of factors that influence the dairy commodity environment, we acknowledge the potential for future volatility.

Fuel, Resin and External Freight Costs — We purchase diesel fuel to operate our extensive DSD system, and we incur fuel surcharge expense related to the products we deliver through third-party carriers. Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuations, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. Another significant raw material we use is resin, which is a fossil fuel-based product used to make plastic bottles. The prices of diesel and resin are subject to fluctuations based on changes in crude oil and natural gas prices. Additionally, in some cases we incur expenses associated with utilizing third-party carriers to deliver our products. The expenses we incur for external freight may vary based on capacity, carrier acceptance rates and other factors. In the first six months of 2019, our fuel, freight and resin costs moderated compared to the prior period. While our freight and fuel usage has increased due to recent facility closure activity, we have worked to mitigate these headwinds through usage reductions and other route optimization activities. We expect these trends to continue during 2019.

Tax Rate

Income tax benefit was recorded at an effective rate of 4.8% in the first six months of 2019 compared to income tax expense at a 23.0% effective tax rate in the first six months of 2018 . Our effective tax rate decreased in the first six months of 2019 , primarily due to an increase in the federal and state valuation allowances. Changes in our profitability levels and the relative earnings of our business units, as well as changes to federal, state, and foreign tax laws, may cause our tax rate to change from historical rates. Our assessment of the realizability of deferred tax assets and the potential for an additional valuation allowance could also impact our future effective rate.

We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets, including net operating loss carryforwards. A valuation allowance is recorded against deferred tax assets, to reduce the net carrying value, when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Our assessment is made on a jurisdiction by jurisdiction basis. In making such a determination,

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we consider the future reversals of taxable temporary differences, projected future taxable income, and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance.

A valuation allowance has been recorded against the deferred tax assets, as a portion of these deferred tax assets are not more likely than not to be realized. As a result of the valuation allowance, a deferred tax liability related to our trademark remains on our consolidated balance sheet as of June 30, 2019. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projected future taxable income.

See the risk factors described in “Part I — Item 1A — Risk Factors” in our 2018 Annual Report on Form 10-K and elsewhere in this Form 10-Q for a description of various other risks and uncertainties concerning our business.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our quantitative and qualitative disclosures about market risk as set forth in our 2018 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Controls Evaluation and Related Certifications

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), referred to herein as “Disclosure Controls”) as of the end of the period covered by this quarterly report. The controls evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon our most recent controls evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of June 30, 2019 .

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated the changes in our internal controls over financial reporting that occurred during the six months ended June 30, 2019 . During this period, we implemented a software solution to process our trade promotion spending as part of our ongoing enterprise-wide cost productivity plan to enhance our internal controls and the overall effectiveness of our trade promotion programs. Additionally, we updated our accounting policies affected by the adoption of ASU No. 2016-02, “Leases (Topic 842)” and implemented a software solution to calculate our right-of-use assets and lease liabilities and to provide related disclosures.

The Company has appropriately considered and integrated these software solutions into our control design and related tests of the operating effectiveness of our internal controls over financial reporting as of June 30, 2019 .

Other than as described above, there have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the six months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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Part II — Other Information

Item 1. Legal Proceedings

In December 2018, the Massachusetts Department of Environmental Protection issued a Unilateral Administrative Order and the Charles River Pollution Control District (“CRPCD”) issued a Notice of Violation alleging violations of state environmental regulations and the terms of the wastewater discharge permit (the “Permit”) for the Company’s subsidiary, Garelick Farms, LLC (“Garelick Farms”). The alleged violations relate to the release of wastewater from Garelick Farm’s wastewater tank in excess of limits established in the Permit. The Company took measures to stop the discharge, recover the wastewater, and clean the affected area. On July 8, 2019, the Company agreed to settle with the CRPCD for a total penalty of $215 thousand. An agreement regarding the terms of the settlement is currently being negotiated by the parties.

From time to time we receive notices of potential violations from the Environmental Protection Agency (“EPA”) resulting from inspections of our facilities. We have cooperated with the EPA with respect to these inspections and in addressing any potential violations, many of which relate to compliance documentation and training. As of August 5, 2019, no fines have been assessed as a result of any of these inspections. We are discussing possible monetary sanctions with the EPA. Monetary sanctions, if imposed as a result of these inspections, may exceed $100 thousand individually or in the aggregate. If we are assessed monetary sanctions in excess of $100 thousand we will disclose such fact in subsequent filings.

Item 1A. Risk Factors

There have been no material changes in the Company's risk factors from those set forth in our 2018 Annual Report on Form 10-K.

Item 6. Exhibits



10.1	Termination and Liquidation of Executive Deferred Compensation Plan and Post-2004 Executive Deferred Compensation Plan dated May 9, 2019
10.2	Post-2004 Executive Deferred Compensation Plan Termination and Liquidation Amendment dated May 9, 2019
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101.INS XBRL Instance Document(1).
101.SCH XBRL Taxonomy Extension Schema Document(1).
101.CAL XBRL Taxonomy Calculation Linkbase Document(1).
101.DEF XBRL Taxonomy Extension Definition Linkbase Document(1).
101.LAB XBRL Taxonomy Label Linkbase Document(1).
101.PRE XBRL Taxonomy Presentation Linkbase Document(1).


(1)	Filed electronically herewith.

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SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	DEAN FOODS COMPANY

	/ S / JEFFERY S. DAWSON
	Jeffery S. Dawson
	Senior Vice President and Chief Accounting Officer

August 7, 2019

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